Human Capital & Careers

Nortel: Finance Made Us Do It

The ''tone at the top'' conveyed the message that earnings targets could be met through application of accounting practices that were not in compli...
Stephen TaubJanuary 12, 2005

Nortel Networks singled out improper actions of its finance department yesterday when it reported its long-awaited restatement of results from 2001 through 2003 stemming from an accounting scandal.

In addition, 12 senior executives agreed to return about $8.6 million in bonuses awarded in 2003.

“While none of these executives was found to have been directly involved in the inappropriate provisioning conduct,” stated Nortel, “these members of the core executive team share the board’s deep disappointment over the circumstances that led to the restatement.”

The telecom equipment giant, which had delayed the release of its financials several times, said 2003 net earnings were revised downward by more than 40 percent, to $434 million from $732 million. However, the company lifted its audited revenue to $10.2 billion from $9.81 billion.

For 2002, Nortel cut its loss to 78 cents per share from 85 cents, but slightly raised revenue to $11 billion from $10.56 billion. And for 2001, it cut its loss to $8.08 per share from $8.52 and hiked its revenue to $18.9 billion from $17.4 billion.

The company added that it will report its results for the first two quarters of 2004 by the end of January.

Nortel improperly boosted sales, in part, by accelerating the booking of contracts for fiber-optic equipment, according to Bloomberg, and miscalculated reserves for expected future expenses. Such provisions can be reversed and income can be boosted when the costs don’t materialize, the wire service explained.

“While the dollar value of most of the individual provisions was relatively small, the aggregate value of the provisions made the difference between a profit and a reported loss, on a pro forma basis, in the fourth quarter of 2002 and the difference between a loss and a reported profit, on a pro forma basis, in the first and second quarters of 2003,” the company stated. “This conduct caused Nortel to report a loss in the fourth quarter of 2002 and to pay no employee bonuses, and to achieve and maintain profitability in the first and second quarters of 2003, which, in turn, caused it to pay bonuses to all Nortel employees and significant bonuses to senior management under bonus plans tied to a pro forma profitability metric.”

The Brampton, Ontario-based company added that its failure to follow U.S. generally accepted accounting principles can be understood in light of the management, organizational structure, and internal controls that characterized its finance organization. These characteristics include management’s “tone at the top,” set by chief financial officer (and later chief executive officer) Frank Dunn, that conveyed the message that earnings targets could be met through application of accounting practices that finance managers knew or ought to have known were not in compliance with GAAP and that questioning these practices was not acceptable.

The company also cited a lack of technical accounting expertise, weak or ineffective internal controls, operation of a complicated “matrix” structure which contributed to a lack of clear responsibility and accountability, and lack of integration between the business units and corporate management as contributing factors.

Nortel also announced that it named Susan E. Shepard, a former commissioner for the New York State Ethics Commission, to the recently created position of chief ethics and compliance officer, reporting to the chairman of the board and the president and chief executive officer.